Is being big a sin?

What is one to make of the conditional approval given by the Competition Commission of India (CCI) to the proposed merger between two of India’s largest drug-makers, Ranbaxy and Sun Pharma? The two parties involved have, understandably, reacted in a guarded fashion, since the deal is yet to go through.

The markets appear to have focused on the fact that a major hurdle (the FIPB and stock exchanges have already cleared the deal; court approval is yet to come) has been crossed, even though the CCI approval comes with riders attached, and has cheered the move by pushing up the stock prices of the two companies.

Competition law specialists appear to be more excited by the fact that this is the first deal after the new competition law came into effect that will involve a stage two — of public scrutiny of the divestment process.

In fact, to ensure process hygiene, CCI chief Ashok Chawla has said the fair trade watchdog will invite one of the “big four” consultancies to supervise the process.

All of which is very well, but I find it surprising that the riders imposed by the CCI to the deal have attracted so little comment. Because the condition it has imposed is that the two companies should, between them, sell off seven drug molecules where the merged entity would have had a “dominant market share” which could lead to potentially anti-competitive market practices or end up distorting fair competition in those segments.

As reported in these columns (‘Sun-Ranbaxy merger gets conditional nod’, December 8), “the seven formulations include tamsulosin + tolterodine (combined market share of 90-95 per cent); rosuvastatin + ezetimibe (90-95 per cent); and leuprorelin (85-90 per cent). The others which adversely impact the market but their share is less than 80 per cent are terlipressin (65-70 per cent); olanzapine + fluoxetine (65-70 per cent); levosulpiride + esomeprazole (60-65 per cent); and olmesartan + amlodipine + hydroclorthiazide (40-45 per cent).”

At first glance, that appears to be pretty fair. A market share of 80-90 per cent is significantly dominant by any yardstick, and one could reasonably assume that this level of dominance will give the player pretty much absolute control over the market.

With such control, the company could dictate who can or cannot sell these drugs, how much a particular seller can actually sell and at what price and margin. Classic anti-competitive behaviour, in fact.

Clearly this is what the CCI had in mind when it ordered that unless these seven molecules were sold off first — and that too, where the second and even third buyers do not end up with a dominant share as a result of the buy — the deal cannot go ahead.

Furthermore, neither parties, nor the combined entity, can buy these back for a period of at least five years post the sell-off. The market for these seven molecules (there is a reason I have to use the term ‘molecule’ and not the easier and shorter ‘drugs’ which will become apparent anon) is well and truly broken up before it was even created! Notch up one for pre-emptive regulatory protection!

But one wonders whether this is indeed the case. The key point here is that the deal hasn’t happened yet, and there has been no case made out yet for anti-competitive behaviour. It is the potential that had the CCI worried and made it decide the way it did. The new competition law does arm the CCI with the power to do precisely that. There is also no definition of what is ‘dominant’ share in the statutes, and it is left to the discretion of the CCI to decide.

This is where there is a potential can of worms waiting to be opened. How does one determine market share or dominance?

The combined Sun-Ranbaxy entity will have a market share of 9.2 per cent, hardly dominant in the Indian pharma sector, which has over 20,000 players, of which 250 large ones together control three-quarters of the market. So you will have to slice and dice the market to look at sub-sections. You can look at therapeutic areas or categories, therapeutic groups and combinations or drill down even deeper to the active molecule level, which is what the CCI has done.

What happens if you do the same elsewhere? Car-maker Maruti Suzuki is a dominant player in the Indian market with a market share of over 42 per cent. If you slice this, to say cars in the sub-four metre length and 800cc or lower engine capacity, then its Alto would have a share of almost 90 per cent! Should Maruti then be forced to sell off Alto to prevent potential anti-competitive behaviour? Ditto for Hindustan Unilever, whose Lifebuoy soap probably has a very dominant share of the basic carbolic soap category. Where does one start? Or stop?

The yardstick, in my view, should be not market share alone, but ease of entry into a particular market and whether there is actual malpractice going on. Here, ease of entry — particularly in generics, where there are no IP roadblocks — is fairly high, which is why there are so many small players surviving in the market.

Further, pricing is regulated for many drugs and fixed by authorities for those in the national list of essential medicines. There are other controls, including annual caps on price increases, which are also in place on others, so price manipulation is both tricky and difficult, and easy to spot.

The competition law, in any case, is a modern piece of legislation, with plenty of provisions — backed by actual teeth — for the CCI to nip unfair trade practices.

It is when one steps into the realm of the possible — let alone the probable — that one steps into a minefield.

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